Luckin Coffee Scandal Hits Chinese Business Again

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(Bloomberg) –

The fallout from the Luckin Coffee Inc. accounting scandal spreads far beyond the high-flying challenger of Starbucks, with new concerns about Chinese corporate governance causing stocks to fall in all sectors and threatening to end. to the country’s initial public offerings abroad.

Xiamen-based coffee chain said on Thursday that its chief operating officer and some underlyings may have produced billions of yuan in sales, which was said to be one of China’s best growth stories. . Luckin Coffee shares plunged up to 81% in the US trade and CAR Inc., a rental company founded by the president of Luckin Coffee, fell 54% in Hong Kong. Popular short selling targets, including Anta Sports Products Ltd., also fell.

Lone Pine Capital, a major shareholder of Luckin Coffee, is no longer reporting a stake in the company, according to one file. It held a 10.7% stake as of January 9, according to data compiled by Bloomberg.

The revelations have rekindled doubts about the financial reports that have for years attracted Chinese stocks listed in the United States and Hong Kong, two stock exchanges frequently chosen by the company’s founders to raise new funds. While China has recently changed its regulations to punish onshore financial fraud, the sanctions remain negligible. One of the largest Chinese manufacturers of publicly traded drugs last year said it had overvalued its liquidity by more than $ 4.3 billion.

“After the Luckin incident, investors will be more careful when investing in Chinese companies that have a short history of founding and rely on huge leverage to grow,” said Jackson Wong, chief operating officer of active in Hong Kong for Amber Hill Capital Ltd.

The news is likely to put at least a temporary freeze on new US listings for Chinese companies, according to four investment bankers who have asked not to be identified as they are not allowed to speak to the media. One of the bankers said that American investors’ appetite for Chinese stocks had already subsided amid a series of disappointing deals and heightened geopolitical tensions between Washington and Beijing.

These concerns are compounded by a general risk drain due to the coronavirus pandemic, which has plunged IPO volumes around the world in recent weeks.

“This will inevitably affect investor confidence and market momentum on other Chinese stocks listed in the United States,” said Steven Leung, executive director of UOB Kay Hian in Hong Kong. “It could even affect the IPO pipeline of Chinese companies in the United States, as investors would begin to question their responsibility.”

Read more: World banks, wary of certain IPOs in China in the United States, renounce agreements

Louis Tse, Hong Kong-based managing director at VC Asset Management Ltd., disagreed, saying that all IPOs must follow the same procedures and meet the same regulatory requirements.

“I don’t think it will tarnish the names of companies entering the Nasdaq,” he said. “Psychologically, it would have an impact, but it’s not necessarily on a Chinese company. “

Outside of the Luckin Coffee family of companies, Friday’s sale affected companies previously called by speculators for their financial reports – including Anta Sports Products Ltd., Xtep International Holdings Ltd. and 361 Degrees International Ltd. China International Capital Corp., one of the main managers of Luckin Coffee’s IPO last year, slipped 5.4% in Hong Kong.

Luckin Coffee suspended chief operating officer Jian Liu and others during its investigation, and said investors should not rely on prior financial statements for the nine months ended September 30. The transactions in question occurred last year and totaled about 2.2 billion yuan ($ 310 million), according to his file.

If this is the case, the sales figure produced could represent a significant part of the company’s total turnover. Luckin, which only released financial data for the second and third quarters of last year after its IPO in May, said sales of 5.15 billion yuan were reported for the whole year, based on the average of estimates compiled by Bloomberg.

“Certain costs and expenses were also greatly inflated by the transactions fabricated during this period,” said Luckin, adding that the board of directors had not verified the figures for manufactured sales.

Thursday’s falling stock wiped out what had been a 54% gain since the company went public last year.

The coffee chain, founded in 2017, operated around 4,500 stores in late 2019 in China. President Lu Zhengyao and President and CEO Qian Zhiya used a strategy they used with CAR Inc. over ten years ago: burn money with investors to quickly gain market share in their rivals. This strategy succeeded in winning over investors.

Luckin Coffee planned to reach 10,000 locations by the end of next year in a market valued at $ 5.8 billion. Coffee consumption is still in its infancy in China, and Luckin Coffee was trying to overtake Starbucks by opening more stores in two years than the industry giant in two decades. Luckin has attracted Chinese consumers by offering generous discounts.

However, problems appeared earlier this year. The title plunged after Muddy Waters Capital tweeted on January 31 that it held a short position after receiving what it called an 89-page uncredited report that exposed accounting problems with the chain and a business model broken. Luckin Coffee has denied the allegations.

The company raised $ 865 million from a stock sale and convertible bond issue in January, according to people familiar with the matter. It also raised $ 645 million in its IPO in the United States.

“Luckin denied reports of the short sellers earlier and then admitted to having committed wrongdoing,” said Kenny Wen, Hong Kong-based wealth management strategist at Everbright Sun Hung Kai Co. ” see the day.”

(Updates with data retention in the third paragraph.)

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